Game consoles 2007: It's Nintendo's market to lose

Posted by Rob Enderle, Principal Analyst, Enderle Group

Analyst Opinion - If you think about it, this will be a fascinating fourth quarter. Nintendo Wii, to pretty much the surprise of everyone, is the product to beat, Sony, the old champ, is on life support but getting a short term uplift, and last week even the Xbox Core unit (which has never sold well) sold very well.    

Part of this drama is due to the Halo 3 release, but let’s take a look at what is going on and recap the strategy each vendor is bringing to the table.
 

PS3:  Blu-Ray improving, but PS-3 still in trouble

This is still amazing to me; Sony dominated the gaming segment to almost the same degree that Apple dominates MP3 players and hopes to dominate phones. But to ensure the success of Blu-ray they had to delay the game system and invest into the PS3 over twice (in premium form) what a Nintendo Wii costs. This allowed Microsoft to gain a massive lead and set up the upset of this decade by Nintendo.  Granted this is kind of a payback for Nintendo who owned this market prior to Sony.   

Sony had three problems. They priced themselves out of the market, they didn’t have any really compelling titles, and most potential customers didn’t care that much about the differentiating Blu-ray player. On that last, according to a recent survey, 40% of PS3 owners don’t even know they have a Blu-ray player (I bet Sony is regretting not bundling the remote control now.)   

What is changing is that Sony has discounted the old 60 GB version of the PS3, which has the emotion engine (this allows for PS2 game playback), effectively turning that version into a unique and attractive deal (which will eventually run out).  This has caused PS3 sales to surge , and it is believed that, after the 60 GB players are sold out, Sony will discount the new 80 GB players to the same level to help drive sales into the fourth quarter.

They will still be the most expensive but Blu-ray is starting to gain traction and they are the only console vendor who bundles a high definition player right now, even the Xbox 360 Elite doesn’t do that. In addition, folks are excited about a number of new PS3 titles coming out in the run up to the holidays and the combination may get the PS3 out of the sand and moving again.  

They even have some late breaking news on some game exclusives for the console.  

While still not the heavyweight the PS2 was and the device is still priced outside of the market, it is looking vastly more competitive at the moment and Blu-ray is starting to look more like an advantage than a disadvantage.  (The whole Blu-ray vs. HD-DVD thing is far from over).   

Sony is improving but I think Microsoft and Nintendo are in far better shape.
 

Xbox 360:  The Halo effect and HDMI

I think the Xbox team made two critical early mistakes with the 360.  They should have made Halo 2 a 360 only game to more quickly ramp 360 sales and they should have put an HDMI port on the box so people could hook up to their High Definition TVs more easily.

The Xbox has been showing very strong sales of late, according to Amazon whose top selling products are the Xbox 360 and Halo 3 preorders. Halo 3 is Xbox 360 only and Microsoft added an HDMI port to their Elite edition. But, they also added HDMI to their Premium edition quietly (probably so folks wouldn’t reject the Xbox 360s already in stores that didn’t have it).  And the coming game list appears impressive.   

Interesting enough, it is the core edition, not the premium edition, that is generating a lot of the buzz suggesting Halo 3 is the major driver and I think that is because most don’t know that the new premium edition Xbox 360s have built in HDMI.  Microsoft also took a pricing action to bring their products down closer to the Wii.   

Finally, the competitive advantage the Wii has with the motion controllers and family style games, is expected to be addressed my Microsoft in a few weeks. I have to believe Sony has a similar plan but I haven’t seen it yet.  (Sony has motion but it’s kind of lame when compared to what the Wii has and what Microsoft has announced).   
Xbox 360, largely because of its early start, still has the largest installed base and a lot of potential, though I really think the console itself is looking a bit old suggesting a cosmetic upgrade or a better set of console mods would make a big difference (I modded my Xbox and it made a huge difference for me).

Microsoft still has a price disadvantage against the Wii and its on-line services, which eclipse the other two players, don’t seem to be making up the difference yet (but this could change).

   

Nintendo Wii:  The once and future king

Nintendo did two brilliant things: The Company priced its console right and focused on expanding the market into family gaming. It is, as a result, the only new console which appears to be picking up thousands of new customers this year.    

By getting people off the couch and concentrating on motion, they got the parents (and particularly the women) excited about its products and this strategy even bled over to the Game Boy, which also appears to be enjoying a bit of resurgence.  

There is something to be said for being a simple pure play; if you think about it, that is what the iPod, Palm Pilot, and Sony Walkman were. They did one or two things well and didn’t try to be everything for everyone.   

The only limitation Nintendo had is that its exclusive game titles haven’t been blockbusters and its success is largely due to the price and that new customer set.   Of course, had Nintendo come up with a killer game title, and there are a bunch that look interesting, we’d probably be only talking about the Wii this year, as the other two companies would have largely been trivialized.  But, that didn’t happen yet, and that sets us up for the granddaddy of all slap downs going into the fourth quarter.  
In a way, this is Nintendo’s market to lose but both Sony and Microsoft are executing aggressive strategies which may contain additional discounting, and Microsoft did just jump to the lead on Amazon, so Nintendo won’t be sleeping easy.   

Wrapping up

In short, we roll into the fourth quarter with all three consoles in the market with lots of available supply and pent up game companies needing to explode into the market space.  

I’d typically say the games will make the difference, but I look at Nintendo’s pricing and unique user experience and I’m not sure that will apply this year.  (I have several friends and relatives already starting to talk about buying Wiis for Christmas).    

Overall, this is going to be a hard one to call, Sony with Blu-ray has the strongest value proposition, Nintendo the most desirable game console pure play, and Microsoft the most breadth (and probably the best selection of actual games). If I were betting, I’d give the edge to Nintendo, put Microsoft in second and challenging and list Sony a long shot third who could actually surprise us all.    

Let the games begin.  

Rob Enderle is one of the last Inquiry Analysts.  Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them.  Currently he provides his services to most of the major technology and media companies. The editorial staff of TG Daily may not necessarily agree with his opinion stated in this article.